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Transocean Ltd. Option Players Eye a Near-Term Consolidation


Puts have been popular on outperforming RIG.

Transocean LTD's (NYSE:RIG) recent pullback had put players circling on Wednesday. Around 14,000 contracts crossed the tape, more than doubling the average daily volume for put options. Via RIG's weekly series of options, speculators placed bets that this negative price action will continue in the short term. Specifically, the stock's 2/8 54- and 55-strike puts saw a collective 4,616 contracts cross, mostly at the ask price. Implied volatility ticked higher at each strike, and open interest rose overnight, indicating the initiation of new bearish positions.

By buying the out-of-the-money 2/8 54-strike put for a volume-weighted average price (VWAP) of $0.12, RIG needs to fall 4.6% from present levels to land below breakeven at $53.88 (strike less VWAP) by the close on Friday, when these weekly options expire. At yesterday's close, delta for this put was negative 6.4%, meaning for every dollar RIG loses over the next two sessions, this put will add $0.06. (Conversely, for every dollar RIG adds through tomorrow's close, this put will lose $0.06).

Meanwhile, breakeven for the 2/8 55-strike puts is $54.78 (strike minus VWAP of $0.22), or 3% below present levels. Delta for this closer-to-the-money strike was docked at negative 15% at last night's close, implying a 15% chance these options will finish in the money by expiration.

Wednesday's penchant for puts was just more of the same for option traders, who have been accumulating puts at a rapid rate in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 0.66 ranks higher than 82% of similar readings taken in the past year. In other words, puts have been bought to open over calls at a healthier-than-usual clip.

The recent tendency toward bearish bets is a bit surprising, given RIG's stellar technical performance in recent months. In addition to outperforming the broader S&P 500 Index (INDEXSP:.INX) by nearly 16 percentage points during the last 40 sessions, the stock has surged around 26% in 2013. In light of this, the recent influx of put buying could simply be shareholders protecting profits against a continued pullback.

The stock is hovering around breakeven in today's session, after the US Bureau of Safety and Environmental Enforcement said drilling companies in the Gulf of Mexico will need to inspect blowout preventers for faulty bolts. According to Reuters, the estimated cost associated with the suspended operations may affect "up to 10% of first-quarter profits for the major rig operators."

This article by Karee Venema was originally published on Schaeffer's Investment Research.

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